Trustees’ lack of bonds exposure raises concerns
In spite of the cash rate falling substantially in the past five years, SMSF trustees are still lagging on their exposure to bonds as an alternative to cash and term deposits, according to AMP Capital.
Speaking to SMSF Adviser, AMP Capital's head of SMSF, Tim Keegan, said while SMSFs have understandably focused on cash and term deposits as a proxy for fixed income, the cash rate is now the lowest it has been in 50 years.
“Clearly SMSFs, particularly those heading into the pension phase, should be looking for an alternative to cash and term deposits to generate better yield,” he said.
The current exposure of SMSFs to bonds is limited, Mr Keegan said, with the ATO statistics for December showing only $5.1 billion or 0.93 per cent of the $533.7 billion assets held in SMSFs invested in debt securities.
The ATO statistics show cash and term deposits on the other hand account for $156.7 billion or 28.3 per cent of all assets.
Mr Keegan said bonds are negatively correlated with equities so in the event of market volatility or a downturn, bonds will typically operate in the opposite direction to equites.
“We all know that markets run in cycles and that in order to protect against downside risk in an equity market correction it’s critically important to have bonds in a portfolio,” said Mr Keegan.
If SMSF trustees hold a combination of equities and bonds, they will be “substantially de-risking their SMSF”, he added.
“For SMSFs heading into retirement, the last thing they want is a sequencing event, a GFC-like event where the value of their assets going into retirement are significantly reduced, so the role of fixed income is incredibly important,” Mr Keegan said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.